Analysis: Can EigenLayer’s $6B Valuation Hold as Tokens Unlock?
Re-staking derivatives are making ETH more useful but adding layers of financial complexity.
Gm Fintech Architects —
Today’s article will be open to everyone. We are diving into the following topics:
Summary: In this article, we discuss the significance of EigenLayer’s token unlock and its impact on the Ethereum ecosystem. EigenLayer allows for the re-hypothecation of staked ETH, enabling liquid staking derivatives (LSDs) to be used as collateral in new networks, thus creating a layered financial structure similar to DeFi’s 2020 boom. While this increases the utility of ETH and provides bootstrapping capital for new protocols, there are concerns about the long-term sustainability of such derivative-heavy systems. EigenLayer is currently valued at $6B, which is 50% of its total value locked (TVL), raising questions about future price corrections as token unlocks add market pressure. We highlight the risks of excessive financial engineering and suggests that while the technology is innovative, the market dynamics could lead to significant volatility.
Topics: EigenLayer, Ethereum, Lido, Coinbase, EtherFi, Renzo, A16Z, Celestia
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Long Take
Derivatives Matryoshka
EigenLayer tokens have unlocked and are now tradeable.
This is a bid deal for Ethereum people. The EigenLayer protocol has been heralded as a powerful primitive of the EVM ecosystem with $10B in associated assets. Below is a technical illustration of what it does.
There are two stories about EigenLayer: (1) the technology story and (2) the derivatives story. Here is our prior coverage of the topic.
The derivatives story is the following.
Computational blockchains used to need proof-of-work, or the burning of GPU, to come to consensus about digital truth. Now, they can use stake — financial capital reserves, in the words of bankers — to generate the same outcome. That means that of all the ETH in the world, a bunch is committed as collateral to make sure nobody cheats on validating the blockchain.
However, if you have a $300B asset and 30%, or $100B, is staked, that means you have $100B of idle capital. And as any large asset manager or capital markets firm will tell you, the markets hate idle capital. A higher percentage of staking means that there is less circulating ETH to be bought and sold, which squeezes up price, and people like this. But having illiquid staked ETH is no fun. Therefore, we have liquid staking derivatives (LSDs), like those built by Lido and Coinbase, that represent a claim on staked ETH but can be traded around. Fun reminder — LSDs depeg when there are shocks and issues in market structure.
Now some of you might be satisfied having a liquid version of staked ETH earning 4% per year from inflation and the inaction of other ETH holders. But for the rest of the degens, enter EigenLayer. What if you could put you LSD into a matryoshka box again, and use the same capital to collateralize other activities, and get yield from those sets of risks? In this way, ETH is used a second time as a stake in new networks, and EigenLayer is a mechanism by which the collateral can be re-hypothecated. A new derivative is issued on top, which includes the yield from being a validator in new protocols like those in the screenshot below.
In this way, EigenLayer is an ICO launchpad that gives new protocols staked ETH capital as a bootstrap for validating those new protocols. Do the new protocols need validation? Maybe, maybe not. Focus on the ICO launchpad part.
If this reminds you of 2020 DeFi summer, where you could take tokens from one project and yield farm tokens of another project by simply putting liquidity into some Uniswap or SushiSwap pool, you are correct. The main difference, of course, is that ETH is larger than any project token that is a component of its ecosystem. Another way to see this is to understand that Apple is larger than any particular app that is distributed through Apple.
The fun bit about the charts above is actually that EigenLayer is happy to take Lido staked ETH derivatives as its own collateral. So it’s not a 1-1 reduction in market share, but rather re-hypothecation that is going on.
Of course, this game can continue. For a while, it wasn’t clear that EigenLayer would reward stakers with its own token, so multiple liquid restaking protocols popped up on top for arbitrage. Projects like EtherFi and Renzo allowed people to stake into them, which in turn created a staking position in EigenLayer, which in turn created a staking position on Ethereum. The liquid re-staking version was immediately tradeable on varios markets. So the game between locking up tokens and creating derivatives that free them back up is just a financial pendulum.
Anyway, we have been worried for a while that this whole thing is an artificial financial engineering structure. You can see that we haven’t spent much time on the technological argument, in part because it is unlikely to be the motivation for market participants who are chasing (1) airdrops and yield-farming, (2) ICO-like token access, and (3) overall narrative. But if you are so inclined, here are the EigenLayer white papers.
The good news is that EigenLayer makes ETH more useful, and keeps new projects running on ETH as capital.
The bad news is that derivatives tend to blow up.
Fair Value
In the old finance world, you would value an asset management business as a percentage of its assets under management. For example, a $100B AUM manager might be worth $2B because the average valuation is 2% of AUM.
Let’s do a quick comparison of some footprints across traditional finance, fintech, and DeFi.
Standalone asset managers, like BlackRock and WisdomTree, are trading at 1.5% of AUM, despite profoundly different levels of scale. Wealthfront, an asset manager with a distribution component is likely somewhere in the 2-5% range. Coinbase, a broker with $100B+ assets under custody is much more commercial than simply AUM fees, which gives it the 35% number. Most Coinbase revenue is from brokerage fees on money in motion, not at rest. When we switch to crypto, Lido is trading at a modest 4.6% of TVL. It is seen as a utility that has saturated the market and is unlikely to experience further asymmetric growth.
EigenLayer, however, is now trading at a fully diluted value of $6B, which is 50%+ of TVL. Its re-staking protocol EtherFi is trading at 25% of TVL. The EtherFi token has already taken a 75% haircut to get here.
To get from 25% to 5% of TVL, the token would need to fall another 80%. Now, that might be mitigated by asset growth, but we can only do an analysis at one point of time.
EigenLayer started even higher.
The above chart is from Aevo, which creates perpetuals markets for assets that are not yet liquid. You can see the price falling about 65% from a high of $10 to $3.6 per token. If EigenLayer ends up trading like Lido at a 5% TVL ratio, it will fall 90%+ more, down to $0.30.
The counterargument is that with a live token, EigenLayer can incentivize many projects to come launch on its platform using the AVS approach (i.e., using ETH as capital for their own networks). And some of this is true. Plenty of networks, including ETH and Solana, bootstrapped themselves into the stratosphere by getting developers to build meaningful applications.
We leave it to you to weigh the risk and reward.
The Tokenomics and Market Dynamics
A huge part of the issue is that many market participants thought that EigenLayer would be a $25B project.
The company raised a series of private rounds, with the last one being $100MM from A16Z in the beginnning of the year. We can’t find the valuation. The prior round in 2023 was at $250MM for equity and $500MM for tokens. It may be fair to assume that the valuation in the last round has doubled to $1B. Here is a guess as to how the cap table looks like —
The claimed airdrop is 160MM tokens, which would be about $500MM at today’s prices. At a $670MM marketcap, this is a hard amount of liquidity to absorb if everyone starts rushing for the exits. Still, the 200MM airdrop is only 1.25% of the total supply. A massive 55%, or implied $3B of value, is sitting locked behind a 1-year cliff for the team and investors. A16z would be up 5x, while early investors are likely up 50x or more. The next 12 months will be a nail-biter.
That is unless they can stake their tokens for rewards and sell them as was the industry practice with Celestia.
Look, let’s be clear.
We love EigenLayer and what it brings to the ecosystem. The design corrects one of the early flaws in Ethereum as projects raised capital with ETH and sold it to build competing networks. We finally have a mechanic by which new projects being built on Ethereum will accrue value to the original chain. We also love the re-staking protocols. Innovations in DeFi are usually volatile in the beginning, but eventually become part of the financial alphabet that everyone can use down the line.
But we also love fair markets with reasonable outcomes for all participants. EigenLayer didn’t need to raise $150MM — it could have launched on $10MM with a $250MM value for the token. Now, the entire community would be looking at meaningful upside rather than watching a marquee project bleed out as it reprices to Lido and unlocks create selling pressure.
It is uncomfortable to hold this view, and we hope to be proven wrong.
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